DEFINING ENTREPRENEURIAL ACTIVITY:
Definitions Supporting Frameworks for Data Collection
Nadim Ahmad and Richard G. Seymour1
This paper sets out definitions of the entrepreneur, entrepreneurship and entrepreneurial activity
for the purpose of supporting the development of related indicators. The paper recognises the
long history in this area and the contention and differences that have existed, and that continue to
exist, between academics who have confronted this issue over the last two centuries. As such it
deliberately adopts a more pragmatic approach based on two principles – relevance and
measurability - resulting in definitions that are developed from both a bottom-up and top-down
approach. Importantly the definitions emphasise the dynamic nature of entrepreneurial activity
and focus attention on action rather than intentions or supply/demand conditions. The paper
concludes with a simple taxonomy of entrepreneurial activity based on the value created and
captured by the entrepreneur.
Background
1. In September 2006, the OECD launched a new Entrepreneurship Indicators Programme (EIP)
to build internationally comparable statistics on entrepreneurship and its determinants, whose aim
is to create a durable, long-term, programme of policy-relevant entrepreneurship statistics. As
such, the work involves developing standard definitions and concepts and engaging countries and
international agencies in the collection of data.
2. The challenge for the EIP therefore is to define entrepreneurial activity in a manner that will
enable valid indicators to be collected and compared across countries, allowing analysts and
policy-makers to better understand the factors that influence the rate and type of entrepreneurial
activity, as well as the outcomes or impacts of entrepreneurship, especially its contribution to
productivity, wealth and employment creation.
3. This challenge is made all the more onerous because of the considerable confusion that exists
in the way that people use the term entrepreneurship. For example, defining entrepreneurship has
occupied scholars for many years and, indeed, to this day there is still a lack of consensus on its
exact meaning. The French economist Richard Cantillon2 is generally accredited with being the
1
Nadim Ahmad, Statistics Directorate, OECD; Richard Seymour, The University of Sydney, Australia.
2
The word entrepreneur itself derives from the French verb entreprendre, meaning „to undertake‟.
1
first to coin the phrase in the context of what we view today as entrepreneurship in about 1730.
Loosely, he defined entrepreneurship as self-employment of any sort, and entrepreneurs as risktakers, in the sense that they purchased goods at certain prices in the present to sell at uncertain
prices in the future.
4. Many eminent economists and scholars including Adam Smith Jean Baptiste Say, Alfred
Marshall and Frank Knight elaborated on Cantillon‟s contribution, adding leadership and
recognizing entrepreneurship, through organization, as a fourth factor of production, but the key
tenets of risk taking and profit were nearly always retained as important features of
entrepreneurship.
5. It was not until Joseph Schumpeter‟s definition of an entrepreneur in 1934 however, that the
more modern interpretation, relating entrepreneurship, additionally, to innovation, entered the
mainstream. Schumpeter defined entrepreneurs as innovators who implement entrepreneurial
change within markets, where entrepreneurial change has 5 manifestations: 1) the introduction of
a new (or improved) good; 2) the introduction of a new method of production; 3) the opening of a
new market; 4) the exploitation of a new source of supply; and 5) the re-engineering/organization
of business management processes. Schumpeter‟s definition therefore equates entrepreneurship
with innovation in the business sense; that is identifying market opportunities and using
innovative approaches to exploit them.
6. However, although Schumpeter‟s definition embodies a characteristic of entrepreneurship that
is widely recognized today, namely, innovation, it still retains some ambiguity that has meant the
debate regarding a definition of entrepreneurs/hip continues; although, to some extent, this reflects
the definition of innovation, in particular whether it relates to incremental or quantum changes.
Moreover, unlike the Knight perspective, for example, the Schumpeterian entrepreneur need not
be a risk taker or business owner, for example. Indeed some (Drucker, 1985) have argued that
entrepreneurship reflects merely the creation of a new organization and that any individual who
starts a new business venture is an entrepreneur; even those that fail to make a profit. Although, it
could be argued that this corresponds to Schumpeter‟s „opening of a new market‟.
7. Indeed, even the OECD itself has contributed to the confusion since virtually every study that
has focussed on entrepreneurship has presented a different definition of the term. For example, in
an OECD Economic Survey in 1997, it was defined as “the dynamic process of identifying
economic opportunities and acting upon them by developing, producing and selling goods and
services”. In “Fostering Entrepreneurship”, it was defined as “…the ability to marshal resources
to seize new business opportunities…”. In a 2001 publication on Youth Entrepreneurship, the
term was equated with self-employment: “… an entrepreneur is anyone who works for himself or
herself but not for someone else…”. Finally, another 2001 publication entitled Drivers of Growth,
referred to, “The concept of entrepreneurship generally refers to enterprising individuals who
display the readiness to take risks with new or innovative ideas to generate new products or
services.”
8. One could go on, reviewing the entire history of entrepreneurship definitions, and indeed we
could add our voices to many that have attempted to do so over the years by coming out on side or
another but we do not think that this would be particularly insightful nor would it necessarily
reflect the primary purpose of this paper.
2
9.
In this context it‟s instructive to reflect a little on the genesis of many of the definitions
developed and argued over the last two hundred years. The key here is that the definitions were
largely developed from a philosophical perspective (top-down approach) with, often, little
concern as to whether or how these definitions could actually be measured. This approach
continues today, even in policy-oriented papers that discuss a concept of entrepreneurship without
attempting to represent or measure it using concretely defined statistics or indicators. Other
papers bypass the discussion of entrepreneurship definitions altogether and simply equate
entrepreneurship to a specific empirical measure (bottom-up approach). Not surprisingly, the
measures selected are those based on the most readily available statistics and only rarely do
authors attempt to justify or explain how the measures represent “entrepreneurship”. Many studies
confuse the definition and the empirical measure of the concept defined as entrepreneurship.
Thus, many studies state, “we define entrepreneurship as the self employed”.
10.
Our approach is different in that it looks at the process from both a bottom-up approach,
that ensures that definitions are measureable, and a top-down approach that ensures relevance.
Indeed the necessity of this overall approach is perhaps best summed up by the economist Peter
Kilby3 who, in 1971, compared those who study entrepreneurship to characters in Winnie The
Pooh hunting for the mysterious and elusive Heffalump. Like the economists and scholars,
familiar with entrepreneurs and their contribution to economic growth, and who have attempted
over the years to define an entrepreneur, the hunters in Winnie The Pooh all claimed to know
about the Heffalump but none could agree on its characteristics.
11. In this sense one can describe our approach as bringing together the most important
characteristics of the Heffalump that are generally agreed on by most academics/policy
makers/analysts, whether those characteristics have been formulated from a bottom-up or topdown approach.
The Bottom-Up approach
12. The bottom-up approach bases itself on the measureable characteristics that have commonly
been used, in practice, to measure entrepreneurship. It recognises that although the Heffalump is a
relatively elusive beast, from a policy perspective at least, it remains broadly understood. Indeed
when policy makers refer to entrepreneurship and entrepreneurs they typically do so in the context
of identifying the phenomenon, and the individuals involved, as being factors that influence some
predetermined policy goal, such as wealth of job creation or income inequality.
13. Our approach is to focus on definitions that facilitate these policy goals, and more specifically
provide the basis for indicators that facilitate evidence based policy making. In that sense it is
important to recognise an important point. The variety of policy goals and the way in which they
can be measured (jobs created, wealth created) immediately points to the notion that
entrepreneurship manifests itself in many ways and, so, is a multi-faceted phenomenon that
cannot be measured with a solitary indicator but rather a basket of indicators. Moreover it is
important to note too that our focus is on defining entrepreneurship from an economic perspective
and so we will make no attempt to provide definitions that necessarily embody social
entrepreneurship, important as this field is.
3
Hunting the Heffalump, 1971.
3
14. Fortunately, these key characteristics or indicators have already been summarised in
accompanying work of the OECD‟s Entrepreneurship Indicators Project (Ahmad and Hoffman,
2007), that seeks to build a framework for addressing and measuring entrepreneurship. The paper
describes and presents a framework that reflects both the determinants, outputs and most
importantly manifestations (performance indicators) of entrepreneurship. And, so, in this paper
we merely refer to and cite the list of performance indicators below:
 employer enterprise birth rates;
 rate of high-growth firms based on employment growth;
 rate of high-growth firms based on turnover growth;
 Gazelle rates based on employment;
 Gazelle rates based on turnover; and
 employer enterprise deaths.
 business churn (the addition of birth and death rates);
 net business population growth (a measure of births minus deaths);
 survival rates after 3 and 5 years,
 the number of firms aged 3 and 5 years old as a proportion of all firms with employees;
 the percentage of employees in 3 and 5 year old firms;
 the average size of 3 and 5 year old firms;
 business ownership rates
 business ownership start-up rates
 the value-added share of young firms, and the average productivity of births, deaths, small
and young firms and their contribution to productivity growth, the innovation and export
performance of small and young firms.
15. That is not to say that the list is necessarily exhaustive nor do the indicators necessarily claim
to explicitly measure entrepreneurship nor entrepreneurs per se but they are important proxies that
paint a picture of entrepreneurial activity and need to be taken into account in developing a
definition that attempts to embody them. Indeed many studies that have used these indicators
explicitly recognise their role as proxies. Many of these studies for example restrict the notion of
entrepreneurship to those new business owners who are particularly innovative, on the basis that
many new business owners simply replicate existing business ideas but data limitations compel
them to use indicators of start-ups (whether self-employment, enterprise or employer enterprises)
as a proxy measure (typically assuming that some stability exists in the share of innovative startups).
16. It may seem somewhat counter-intuitive that the list of indicators used to measure
entrepreneurship described in the OECD‟s framework should precede the development of a
definition. The truth is somewhat different however, since the development of a definition has
proceeded in line with the development of the framework. Moreover the concurrent approach to
4
these developments reflects a pragmatism in both the definitions and the framework, which are
both driven by the need to meet policy-makers needs.
17.
Policy makers are interested in facilitating or encouraging the growth of
entrepreneurship because it is recognised as a force for good. These „goods‟ or objectives are
about creating value in one domain or another, and, as noted above, these can be very diverse.
And so „value‟ covers both monetary and non-monetary returns. These values are, naturally,
identified as objectives or targets by policy makers, who will then develop policies designed to
achieve these targets although clearly they are carried out by entrepreneurs and entrepreneurial
firms. Some countries for example will focus on entrepreneurship‟s contribution to economic
growth. Other countries however might focus on entrepreneurship‟s contribution to solving
environmental problems or its contribution to social inclusion. Distilling some commonalities, and
relating these to the idea of value creation, one can distil the following key elements from the list
above :
 entrepreneurship is about the creation of new businesses;
 entrepreneurship creates businesses, pre-existing or otherwise, with typically higher growth
than non- entrepreneurial competitors;
 concomitant with the view that, at least some, high-growth enterprises reflect aspects of
entrepreneurship is the idea that entrepreneurship can be manifested even in the absence of an
entrepreneur. This creates an important distinction between Entrepreneurs and Entrepreneurial
Activity. Where there are entrepreneurs there will always be entrepreneurial activity but it is
important to note that the latter is not dependent on the existence of the former. This is
important because individuals within businesses may demonstrate entrepreneurship without
necessarily having a stake in the company. This means that all companies, whether owned by
shareholders or trust funds for example and managed/run by salaried directors can still be
entrepreneurial and the way they operate their businesses can be of benefit to other businesses
owned and managed by entrepreneurs.
 following on from this, is the idea that entrepreneurs and entrepreneurship are not concepts
that relate exclusively to small businesses or the self-employed, as many studies, through
expedience, have often assumed. Our view is that entrepreneurship as a definable phenomenon
reflects certain characteristics that relate to the processes through which it is manifested and
this is not uniquely the preserve of small companies or entrepreneurs, important though these
are to the entrepreneurial process. Moreover it is important to avoid a definition that is
possibly counter-productive from a policy perspective. Clearly, large companies can be
entrepreneurial and it is important that these companies are not ignored when formulating
entrepreneurship policies
 entrepreneurs are business owners, incorporated or otherwise.
18. None of these measures reflect some of the more precise characteristics normally associated in
the literature, and discussed below in more detail, with entrepreneurs/ship, such as innovation and
perhaps risk taking, which, is however partly embodied in the idea of a business owner and
businesses more generally. However they do all at least, in part, capture the essence of these ideas,
and this explains why they are commonly used in entrepreneurship studies.
5
19. Ultimately when references are made to entrepreneurship it is in relation to the idea that that
there is something different about entrepreneurial businesses that sets them apart from other
businesses. Policy makers are not for example interested in merely encouraging the creation of
new businesses as the be all and end all. Their interest is in creating successful and sustainable
entities (high-growth companies and gazelles) and indeed the creation of a business environment
(competitive) that nurtures and stimulates their growth of, and the growth of more productive,
companies in general (hence the encouragement of business creations). No country for example
would ever target increased levels of self-employment indefinitely; businesses need employees to
grow and to compete and clearly it would not be desirable for everybody to become selfemployed in the truest sense of the word.
20. This is why it‟s important to recognise that the indicators described above are proxies for
entrepreneurship. What policy makers are typically interested in, and indeed what the most
common definitions embody, as shown below, is that entrepreneurial businesses are in the
business of doing something different, new even, and in fairness this is what the most commonly
used indicators try to capture. Clearly not all businesses are entrepreneurial despite the fact that
they take risks, create products, employment, revenue and taxes. If entrepreneurship studies were
just about businesses and the people who owned or ran them, entrepreneurship would just be a
euphemism for the general business environment. Indeed not even all new businesses are
necessarily entrepreneurial. But clearly, the indicators, proxies or not, provide an indication of the
types of definitions needed for both entrepreneurs and entrepreneurship.
21. The indicators described in the framework for entrepreneurial performance therefore should
be seen as tools that improve our understanding of „pure‟ entrepreneurship and indeed can be
viewed as measures that have loose or strict interpretations of „new‟ and „new‟ can reflect „new
products, processes or markets‟. All new businesses or increases in self-employment for example
could be considered as creating new markets if one takes a liberal interpretation of „new‟ for
example. Moving further down the spectrum one could equally argue that indicators of highgrowth enterprises, which are more likely to have demonstrated „pure‟ entrepreneurship, take us
closer to a stricter definition of „new‟. But one still needs to recognise that all along the spectrum
the indicators are merely proxies, For example some high-growth firms‟ growth will not reflect
entrepreneurship at all, and indeed, their growth may reflect the very antithesis of
entrepreneurship, for example, firms in monopoly positions with rapid growth.
22. In summary, therefore, the list of indicators points to the following: entrepreneurs, and what
differentiates them from other business owners, are in the business of doing something different,
whether that be through identifying new products, processes or markets that increase the
likelihood of success, employment, productivity and efficiency of their company. Entrepreneurs
are also involved in the day-to-day running of the company to differentiate them from mere
financiers such as business angels, shareholders, silent partners etc. An entrepreneurial company
is one that displays the characteristics of doing something different, (new products, processes,
markets) but does not necessarily need to have an entrepreneur at the helm. Employees can also
be entrepreneurial. Entrepreneurship is also about doing. The creation of a new idea is an
important pre-cursor to the creation of an entrepreneur or entrepreneurial firm but
entrepreneurialism is not just about thinking. There needs to be some concrete manifestation of
the idea and this is reflected in the creation of a business or the embodiment of the idea within a
business. That is not to say that indicators reflecting the numbers of creators of ideas are not
6
important. Clearly they are, as they provide an important indication of the potential for
entrepreneurs and entrepreneurship, but one needs to recognise that indicators such as these will
be rife with problems for international comparability, reflecting cultural differences as much as
real differences in entrepreneurial potential.
Top-Down Approach
“The function of the entrepreneur is probably as old as the institutions of barter and
exchange” (Hébert & Link, 1988 p. 8). The study of the entrepreneur also has a long tradition,
and yet there continues to be no widely-accepted definition of the term „entrepreneurship‟
(Hornaday, 1992, Ucbasaran, Westhead, & Wright, 2001, Watson, 2001).
Conflicting Extant Definitions
23. The lack of a single definition is partly due to the differentiated traditions within the field of
entrepreneurship research including: anthropology (for example, de Montoya, 2000, Firth, 1967,
Fraser, 1937), social science (see for example Swedberg, 1993, Waldringer, Aldrich, & Ward,
1990, Weber, 1898/1990), economics (including Casson, 2003, Kirzner, 1973, Schumpeter, 1934,
Shane, 2003, von Hayek, 1948, von Mises, 1949/1996) and management (for example, Drucker,
1985, 1999, Ghoshal & Bartlett, 1995).
24. Conflicting definitions, even within the specific themes, such as economics, which is our key
focus, are also due, in part, to the broad contextual focus of the studies, as demonstrated by the
variety of entrepreneurship related indicators described above. A smorgasbord of definitions is
presented in Table 1 highlighting several definitional ambiguities. These ambiguities are further
complicated by the proliferation of „sub-categories‟ of entrepreneurship research, which introduce
additional terminology including: „corporate entrepreneurship‟, „corporate venturing‟,
„intrepreneuring‟, „internal entrepreneurship‟, and „venturing‟ (Sharma & Chrisman, 1999).
7
Table 1 – A Superficial Review of Extant Definitions
Essence of definition
Publication
Entrepreneurs buy at certain prices in the present and sell at uncertain prices in the
future. The entrepreneur is a bearer of uncertainty.
(Cantillon,
1755/1931)
Entrepreneurs are „pro-jectors‟.
(Defoe, 1887/2001)
Entrepreneurs attempt to predict and act upon change within markets. The entrepreneur
bears the uncertainty of market dynamics.
(Knight, 1921)
(Knight 1942)
The entrepreneur is the person who maintains immunity from control of rational
bureaucratic knowledge.
The entrepreneur is the innovator who implements change within markets through the
carrying out of new combinations. These can take several forms:
 the introduction of a new good or quality thereof,
 the introduction of a new method of production,
 the opening of a new market,
 the conquest of a new source of supply of new materials or parts, and
 the carrying out of the new organisation of any industry.
(Weber, 1947)
The entrepreneur is always a speculator. He deals with the uncertain conditions of the
future. His success or failure depends on the correctness of his anticipation of uncertain
events. If he fails in his understanding of things to come he is doomed…
(von Mises,
1949/1996)
The entrepreneur is co-ordinator and arbitrageur.
(Walras, 1954)
Entrepreneurial activity involves identifying opportunities within the economic system.
(Penrose, 1959/1980)
The entrepreneur recognises and acts upon profit opportunities, essentially an
arbitrageur.
(Kirzner, 1973)
Entrepreneurship is the act of innovation involving endowing existing resources with
new wealth-producing capacity.
(Drucker, 1985)
The essential act of entrepreneurship is new entry. New entry can be accomplished by
entering new or established markets with new or existing goods or services. New entry
is the act of launching a new venture, either by a start-up firm, through an existing firm,
or via „internal corporate venturing‟.
(Lumpkin & Dess,
1996)
The field of entrepreneurship involves the study of sources of opportunities; the
processes of discovery, evaluation, and exploitation of opportunities; and the set of
individuals who discover, evaluate, and exploit them.
(Shane &
Venkataraman, 2000)
Entrepreneurship is a context dependent social process through which individuals and
teams create wealth by bringing together unique packages of resources to exploit
marketplace opportunities.
(Ireland, Hitt, &
Sirmon, 2003)
Entrepreneurship is the mindset and process to create and develop economic activity by
blending risk-taking, creativity and/or innovation with sound management, within a new
or an existing organisation.
(Commission of the
European
Communities, 2003)
8
(Schumpeter, 1934)
25. However a number of commonalities emerge. Many recognise the risk-taking role of the
entrepreneurs; others the role of innovation, or the creation of something new, whether that be a
process, product, market or firm, others refer to the arbitrage role of the entrepreneur.
26. The challenge is to marry these commonalities with those identified from looking at the
indicators above. First, the idea of risk-taking alone, or a bearer of uncertainty, as defined by
Cantillon and Knight in his earlier thinking, seems a bit too broad to be a useful measure of
entrepreneurship, at least for our purposes and indeed those of policy makers. Risk takers for
example, or bearers of uncertainty, include money lenders, banks etc, and the lending of money,
although of itself important to the entrepreneurial process as a form of funding, does not seem in
and of itself to be entrepreneurial. The arbitrage view espoused by Walrus and Kirzner appears
similarly deficient in this context, particularly given some of the key arbitrageurs in today‟s
modern economies (traders on the money markets). Definitions that reflect risk or arbitrage alone
therefore do not stand up to scrutiny as being workable definitions, at least as far as the key policy
targets are concerned (both current and potentially those of the future).
27. That said an individual who created a business to lend money for example might be
considered entrepreneurial if the firm itself demonstrated entrepreneurial characteristics, such as
doing something „new‟, as reflected in the definitions of many others, notably Schumpeter and
Knight‟s later thinking, which includes a reference to innovation and change.
28. The idea of risk-taking however cannot be entirely overlooked. Our view however is that the
notion of risk or indeed arbitrage is captured within the idea of doing something „new‟.
Sometimes the entrepreneur for example creates the arbitrage situation by creating a new product
or process for example, or takes a risk by entering a new market.
29. An important and necessary addition to these characteristics for our purposes is in the „doing‟
as described earlier. There needs to be some visible manifestation of this doing through the
creation of something new that in turn generates value, whether that value is in terms of jobs.
wealth or some other policy objective..
Formal Definitions
30. Drawing on the above analysis and arguments, the following definitions of the entrepreneur,
entrepreneurship, and entrepreneurial activity are therefore proposed
Entrepreneurs are those persons (business owners) who seek to generate value, through
the creation or expansion of economic activity, by identifying and exploiting new products,
processes or markets.
Entrepreneurial activity is the enterprising human action in pursuit of the generation of
value, through the creation or expansion of economic activity, by identifying and exploiting
new products, processes or markets.
Entrepreneurship is the phenomenon associated with entrepreneurial activity.
31. . As shown, though we restrict our notion of entrepreneurship to economic activity, we do not
simply equate any business activity with the term entrepreneurship. We associate entrepreneurship
9
with the critical stages of creation and development of new economic activity. Many other
indicators already exist to measure all other stages of business activity in a country.
32. Another question that is often raised is whether an entrepreneur must be the owner of a firm.
Can employees also be “entrepreneurial”? We recognise that many companies will want to instil
an entrepreneurial spirit in their employees and will encourage them to take responsibility and to
be creative and innovative. Employees are urged to “take ownership” of particular components of
the company‟s work and be remunerated accordingly for success. Terms such as intra-preneurship
have been coined to describe some of these notions. These are all important activities to measure
and will be of interest to those analysing entrepreneurship and its impacts. As stated above, our
definitions recognise a distinction between the entrepreneur, who is a business owner, and
entrepreneurial activity.
33. Finally, another much-debated notion of entrepreneurship is whether all self-employed are
considered to be entrepreneurs, even if they are working independently without employees. Given
technology and new business models, even an independent “entrepreneur”, without employees
can innovate, implement new products and processes and “grow”. Furthermore, we realise that
different countries have different objectives for entrepreneurship policy. Given these different
possible policy objectives and other considerations, the definition is set deliberately broad to
capture these possibilities. Importantly however it is precise, subject to a certain threshold of
„new‟ being established.
34. In offering these definitions, we realise that they cover only a subset of entrepreneurial
activities, as they focus on business owners. The focus on business-related entrepreneurship does
not imply that other forms of entrepreneurship are unimportant. It simply reflects a conscious
decision to orient the definition towards the economic policy interests of OECD, EU and other
countries. The definition facilitates and supports the construction of the framework, referred to
above, that improves our understanding and ability to measure the process and outcome of
activities that determine business-related entrepreneurship.
35. We do not set out to define what „new‟ is or how it should be defined. This is deliberate. As
discussed above the definition of new is in some respects an issue of convention. The indicators
described in the OECD‟s framework all implicitly focus on different interpretations of what „new‟
is, and this, perhaps surprisingly, is one of the strengths of the framework and the definitions,
since ultimately it is the role of policy makers to determine the policy goals, and so the types of
entrepreneurship and entrepreneurs they wish to foster. Despite this relative „vagueness‟ the
definition also lends itself well to international comparability since it provides the umbrella for
comparable indicators to be produced across countries that can be developed in a harmonised
way, reflecting different definitions of new. Moreover it is also very easy to define „new‟ in a
more quantitative way as the basis for more focussed analyses and surveys.
36. The annex that follows takes a more detailed look at the various philosophical and theoretical
treatises on entrepreneurship definitions and provides a more elaborate description and argument
of how these thinkings have influenced our definitions.
10
ANNEX
There could be seen to be two broad streams of literature that have explored: (i) the
entrepreneur‟s characteristics and profiles, (ii) the entrepreneur‟s processes and activities, and (iii)
the impact of entrepreneurial activity. Academics have recently called for researchers to focus
their efforts on the entrepreneurial process (Busenitz & Barney, 1997, Davidsson & Wiklund,
2001, Dess, Lumpkin, & McGee, 1999, Sarasvathy, 2004), an approach taken in this paper.
Understanding the Business of the Entrepreneur
Before exploring the nature of entrepreneurial activity, this paper anchors itself in
management literature that has explored „ordinary‟ business activity. As summarised in Table 2,
researchers in the field of management have developed frameworks to assess the external
environmental and industrial structures confronting a firm (based heavily on Porter (1980)) as
well as the internal resources and capabilities of a firm (based heavily on Barney (1991)). These
conceptualisations were developed to assist researchers and practitioners develop and explore
strategies that create sustained competitive advantage and earn above-average returns.
Table 2 – Overview of Management Literature
School
Concepts
Key Texts
Markets - the I/O or
Market-Based View
(MBV) of strategy
Superior firm performance is a result of industry
structures.
The structure of an industry is considered to have an
impact on the conduct and behaviour of its participants,
which in turn will impact firm behaviour (hence the
Structure-Conduct-Performance framework).
Porter (1980, 1990),
Bain (1951, 1956,
1968), and Mason
(1939).
Resources &
Capabilities - the
Resource-Based View
(RBV) of strategy
Superior firm performance is a result of valuable
resources and capabilities.
Resources can be physical (such as property or plant),
financial, or intangible (such as brands, intellectual
property). They are valuable if they are rare, there is
demand for them, they cannot be easily copied or
substituted, and they are durable and competitively
superior. Resources can be traded (e.g. patents) and are
converted into final products or services by using a wide
range of other assets.
A firm‟s capabilities are based on “developing, carrying,
and exchanging information through the firm‟s human
capital” (Amit & Schoemaker, 1993 p. 35)
Penrose (1959/1980)
Wernerfelt (1984),
Prahalad, Bettis and
Hamel (Prahalad &
Bettis, 1986,
Prahalad & Hamel,
1990), Barney
(1991), Castanias
and Helfat (1991),
Amit and Schoemaker
(1993), and Peteraf
(1993).
11
The Market-Based View (MBV) perspective suggests that a researcher studying business
activity could focus on understanding how particular industry structures will impact firm
performance. For example, whether industries with a particular structure (such as industries with
high barriers to entry and rivalry of competition, low threats of substitutes, in which participants
enjoyed high bargaining power over suppliers and customers) are more, or perhaps less,
„conducive‟ to firms‟ earning super-normal returns.
Alternatively, the Resource-Based View (RBV) perspective could be utilised by researchers
to explore how the performance of an organisation related to: (i) their financial, physical or social
resource endowments (for example their financial resources or intellectual property), and (ii) how
the firm‟s resources are deployed (as capabilities). In order to generate sustainable competitive
advantage, resources “must provide economic value and be presently scarce, difficult to imitate,
nonsubstitutable and not readily obtainable in factor markets (Barney, 1991, Dierickx & Cool,
1989, Peteraf, 1993)” (Powell, 1992 p. 552). A firm‟s capabilities are based on “developing,
carrying, and exchanging information through the firm‟s human capital” (Amit & Schoemaker,
1993 p. 35) and may involve a firm‟s employees or systems, or be carried in the firm‟s customer
base and their perceptions (e.g. brand) (Itami, 1987). These may be „super‟ capabilities which
have been referred to as „core competencies‟, which are critical to a firm‟s performance and are
typically those involving collective learning and are knowledge-based (Prahalad & Hamel, 1990).
Distinguishing between the resources, capabilities and market impacts on a firm‟s
performance provides the platform for the definition of entrepreneurial activity.
DYNAMIC & INSIGHTFUL ENTREPRENEURIAL ACTIVITY
Returning to the dynamic conceptualisations emphasised in extant entrepreneurship
definitions. Entrepreneurship was seen to involve human activity that was not generally done in
an „ordinary business routine‟ (Schumpeter, 1934, von Mises, 1949/1996). Entrepreneurial
activity is differentiated from the relatively „static‟ management (Leitung) (Hartmann, 1959), and
is concerned with the process of change, emergence, and creation (Bruyat & Julien, 2000,
Hartmann, 1959, Schumpeter, 1934, Weber, 1947).
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Figure 1 – Entrepreneurial Activity in the Commercial & Wider Environment
Figure 1 invokes the two-faces of the Roman god Janus to emphasise that the entrepreneur is
simultaneously looking back to the resources (and combining them in new and creative ways) and
forward to markets (and perceiving new or unmet opportunities). The entrepreneur perceives and
recognises a fit between the two, a process referred to as innovating. The entrepreneur‟s activities
occur within a business context, which includes industry structures, competition, and national
economic structures. This business context is impacted in turn by wider environmental
considerations, which include the economic, political, legal, social, cultural, social, and natural
settings.
In undertaking such entrepreneurial activities, the entrepreneur is endeavouring to create
value. The entrepreneurial community has long recognised the significance of value creation (for
example, the venture capital community has this as a guiding mantra), and now management
researchers too are increasingly recognising the importance of value analysis (for example
(Lepak, Smith, & Taylor, 2007, Styles & Seymour, 2006)).
Understanding Entrepreneurial Activity
This paper focuses a researcher‟s attention on the understanding of four key considerations:
(a) enterprising human activity; (b) the assembly of unique bundles of resources, identification of
market opportunities, and/or utilisation of innovative capabilities; (c) the significance of the
business and wider environments, and (d) the creation of value. These are now introduced in turn.
a) Enterprising Human Activity
Returning to the earliest conceptualisations of the entrepreneur as the person „undertaking‟ or
„projecting‟ into their future (Cantillon, 1755/1931, Defoe, 1887/2001). As noted by von Mises
13
(1949/1996 pp. 290-91), the entrepreneur “cannot evade the law of the market. He can succeed
only by best serving the consumers. His profit depends on the approval of his conduct by the
consumers.”
As well as recognising the conceptual importance of action, researchers have included the
concept in their definitions of entrepreneurship (Gartner, 1985, Low & MacMillan, 1988,
Lumpkin & Dess, 1996). However, entrepreneurship need not be defined by the formation of a
new enterprise, for example an entrepreneur may licence an idea or concept to another firm
(Shane, 2003). A more appropriate conception is that from Stevenson and Jarillo (1990), who
proposed entrepreneurship to be the study of why, how and what happens when entrepreneurs act.
Understanding the organising process is one of the necessary elements of entrepreneurship:
“Entrepreneurs create new organizations through a dynamic process that involves such activities
as obtaining equipment, establishing production processes, attracting employees and setting up
legal entities” (Shane, 2003 p. 247)
b) Leveraging Creativity, Innovation and/or Opportunity
To organise the human activities, the analysis now explores the nature of entrepreneurial
activities, organising the analysis according to resources, capabilities and markets introduced
above.
Resources include access to: (i) physical capital such as property or plant and equipment, (ii)
financial capital such as debt finance or equity, and (iii) intangible resources such as intellectual
property or technology. These resources can typically be bought and sold by firms or individuals.
Changes in these resources can have dramatic implications for firm performance, with changes in
these resources typically resulting from (i) creative inventions or discovery, or (ii) unusual and
unique combinations of these resources such as venture capital funding. Entrepreneurial activity
in „creative resources‟ is supported by the „entrepreneurial community‟, which includes venture
capitalists, debt providers, and intellectual property lawyers.
Capabilities include the human and social expertise required to leverage a firms resources to
market. In an entrepreneurial context, these innovative capabilities include the perception and
recognition of a match between creative resources and market opportunities. This may include
novel and skilled capabilities as well as unique or unusual social networks and connections.
The perception and discovery of market opportunity is an important focus of entrepreneurship
research (Ardichvili, Cardozo, & Sourav, 2003, Gaglio & Katz, 2001, Hills, Lumpkin, & Singh,
1997, Kirzner, 1997, Shane & Venkataraman, 2000), as it is one of the most important abilities of
successful entrepreneurs (Ardichvili, Cardozo, et al., 2003) and is one of the core intellectual
questions for researchers (Gaglio & Katz, 2001). Market entry need not result in the founding of
a new firm or the use of market mechanisms, however “it does require the creation of a new way
of exploiting the opportunity (organizing) that did not previously exist” (Shane, 2003 p. 7). This
organising is a process (not a state).
c) Operating in Changing & Uncertain Environment
Two influential perspectives on entrepreneurship stem from Joseph Schumpeter and Israel
Kirzner: Schumpeter (1934) viewed entrepreneurship as creating market disequilibrium from its
14
original equilibrium position by generating innovations, i.e., as disruptive. This disruptive
entrepreneurship should not be interpreted as destroying and replacing industries with new ones
but as bringing change to the market to a greater or lesser degree.
Given the different ways entrepreneurs fulfil their role in the market; it can be argued that
Kirznerian and Schumpeterian entrepreneurs could both work simultaneously, as the former
engage in arbitrage and the latter in innovation.
Cultural impacts, widely considered in Entrepreneurship literature, are a narrow consideration
of the entire environment affecting entrepreneurial activity. These wider environmental impacts
include the natural, social and cultural environments. One popular framework for analysing these
impacts is the PESTLN framework: political, economic, socio-cultural, technological, legal and
the natural environments. These environmental impacts are typically outside the control of the
entrepreneur, and outside the control of the particular industry participants.
In addition to the environmental factors, the business environment will impact entrepreneurial
activity. These factors could include industry structures, impacted by bargaining power, threats
and competitive rivalry. Policymakers can have significant impact on these industry conditions.
d) The Creation of Value
The entrepreneur creates extraordinary value in the sense that their entrepreneurial activity
results in sustained competitive advantage and super-normal returns for a number of parties.
Innovators (entrepreneurs) enjoy “temporary monopoly power” (Baumol, 1993 p. 6). When
imitators see a signal that above-normal gains can be made, they enter and erode the
entrepreneurs‟ profit and return the market to equilibrium.
As reviewed in Walker and Brown (2004), entrepreneurs have been shown to value a number
of non-financial measures of success, including autonomy, job satisfaction, the ability to balance
work and family. These are all subjectively and personally defined, however can have a major
impact on the decisions and exchanges involved in the creation and exploitation of opportunities.
Similarly, at the firm and national levels, value can include economic, social or cultural
significance. Economic value would be considered in relation to an activity‟s pecuniary, or
dollar, output and include concepts such as economic growth, productivity growth etc.
Alternatively, an entrepreneurial undertaking can create social value such as personal
relationships, poverty reduction, enhancement of job satisfaction or the creation of better jobs. A
third value that could be considered in addition to these two extrinsic values is cultural value,
which relates to the development of creative or cultural capital.
Entrepreneurial activity results in more than self-employment, and may include returns to
employees, shareholders, society (through taxes and other payments), other members of the
entrepreneurial community (such as financiers and advisors) and customers (through superior
value propositions).
Entrepreneurial value creation and exchange can form the basis of understanding
entrepreneurial activity and its impacts at both a microlevel (individual, group) and macrolevel
(organisation theory, strategic management, and policy-level). Furthermore, impact of value
15
creation provides insights into the relationship between new ideas and their exploitation (March,
1991) and the associated differences between value creation and value capture (Lepak, Smith, et
al., 2007).
MEASURING DETERMINANTS, PERFORMANCE & IMPACT OF
ENTREPRENEURIAL ACTIVITY
It is important for policy-makers and academics to recognise that a suite of data will be
required to measure and influence entrepreneurial activity. In additional to the data sourced from
national statistical offices, data sets will necessarily include survey and other sources of
information.
What the Definitions Do Suggest
The definitions suggest that any indicator should include reference to the value created by
entrepreneurial activity, the changes in resources, capabilities and opportunities confronting an
entrepreneur, and the business and wider environments that will impact activity. The definitions
are proposed to guide the collection and interrogation of data sets.
What the Definitions do Not Suggest
Note that these definitions differentiate entrepreneurial activity from „ordinary‟ business
activity, and: (i) do not limit entrepreneurial activity to new markets (opportunity) or new
products (creative resources) alone, but also includes new processes (innovating), (ii) emphasise
entrepreneurial action is manifested rather than planned or intended, (iii) do not equate activity
with the formation of any particular „vehicle‟ such as incorporated entity or legal structure, and
(iv) incorporate economic, social and cultural value created. Addressing each of these issues in
turn…
Entrepreneurial activity includes the entry of new markets, the creation of new products or
services, and/or the innovation associated with different business activities (new markets, new
capabilities, new products/services). Entrepreneurial activity can therefore be associated with
organic as well as acquisitive decisions. The essential question relates to whether the activity
involves new entry and activity (not how that entry or activity was „acquired‟).
Secondly, entrepreneurial activity does not include those people considering or planning
entrepreneurial activity. Such phenomena would be considered in relation to cultural or sociocultural analysis, which may indeed impact entrepreneurial activity indirectly. This could be
contrasted with the Index of Total Entrepreneurial Activity (TEA-index) (Reynolds, Bosma,
Autio, Hunt, De Bono, Servais, Lopez-Garcia, & Chin, 2005), which measures the ratio of people
classified as entrepreneurs to the total adult population. The criteria for classification of
„entrepreneur‟ is based on whether a respondent is planning to, or owning and managing a
business aged between 0 and 42 months (Minniti, Bygrave, & Autio, 2006). The definitions
16
proposed in this paper do not measure those „considering‟ entrepreneurial activity, nor does it
differentiate between entrepreneurs in new or old ventures. The success of an entrepreneur‟s
undertaking is based on the strength of their perceived opportunity, innovative capabilities and
creative resources. It is not based on their intentions or on a supply/demand equation for
entrepreneurs.
Thirdly, and related to the second point above, there is no particular „vehicle‟ that is required
for entrepreneurial activity to be „undertaken‟. In developing economies, it may be appropriate
for researchers to measure the number or rate of firms entering the formal economy, however for
developed economies, an entrepreneur may utilise either an incorporated entity, partnership, or
operate as a sole trader as the entrepreneurial vehicle. It may well be that the establishment of
new firms can be an important indicator of entrepreneurial performance, however it is not in itself
entrepreneurial. For illustrative purposes: The formal establishment of a firm is perhaps one of
the least significant events that an entrepreneur will initiate. For example, Bhidé (2000) argues
that the most critical issue for entrepreneurial businesses is the first large investment (and not the
establishment of the business).
Finally, entrepreneurial activity does not result in economic impacts alone. There are
important social and cultural impacts of entrepreneurial activity. These impacts can affect the
narrower business environment or industry, as well as the wider natural, social and cultural
environments. Although pecuniary data are often the simplest and most widely available
measures available, the definitions do not limit the value considerations to economic outputs
alone.
Different ‘Types’ of Entrepreneurial Activity
As has been alluded to in the above review, there are many „types‟ of entrepreneurial activity,
from corporate venturing to social change enterprises. Value created by entrepreneurs can be
either captured by the entrepreneur (either a lot or a little) and/or exchanged or shared with others
(for example with employees, stakeholders and society).
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Figure 2 – Categorising the Impact of Entrepreneurial Activity
Referring to Figure 2, those people creating little personal and little value for others are
referred to as „self-employed‟ or „subsistence entrepreneurs‟. Traditionally these people have
been considered as self-employed or micro-businesses. Those creating value primarily for others
are categorised as „social entrepreneurs‟. Traditionally these people have been considered as
volunteers or development workers. The term „entrepreneur‟ is reserved for those creating
significant value or wealth themselves and others. This group of people are often considered in
terms of „born-globals‟ or „gazelles‟. The framework can also be expanded to a three-dimensional
box if it recognises that this value creation can occur in benign or hostile environments (Covin &
Slevin, 1989).
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